Thursday, September 29, 2005

Gas Price Gouging Report

The Canadian Centre for Policy Alternatives has put forth a report available here [PDF] indicating that gasoline companies are indeed gouging us.

My first reaction was, "Well, duh." But, they do put some math around it.

Their calculation goes as follows:

What should the price be? What would it be if we weren’t being gouged by the oil industry? Let’s figure it out. Crude oil at $68 (U.S.) a barrel translates to 50 cents per litre (Cdn) at the pump. Normal refining and marketing margins add 14 cents per litre. Provincial taxes (Ontario) add 14.7 cents. The federal gasoline tax adds 10 cents per litre, for a total of 88.7 cents per litre. Add 6.3 cents for the GST, and that gives us 95 cents — which is what we should be paying.
What the policy paper then indicates that it isn't taxes that are keeping the price of gas up.

Agreed, to a point.

The 24.7 cents that are flat taxes from Ontario and Ottawa aren't contributing to the high price (they contribute to a higher price, but an effect that diminishes as the cost of gas goes up).

Now, if you're the oil industry, as the paper suggests, you're bumping up the production of that oil for no reason - the problem then becomes we pay that wonderful 7% GST on top of the gouging. So, entirely claiming that taxes aren't contributing are somewhat false.

Gas in my neighbourhood is $1.15 per litre. That means the federal government collects in GST 7.5 cents a litre; 1.2 more than it "should". If the gas jumps to $1.30/L, the GST collected is 8.5 cents a litre; 2.2 more than it "should".

So, let's call a spade a spade.

  • The oil industry is gouging us.
  • The government gets increased GST revenue from that gouging. Especially when consumers have no choice but to pay for the gouge-priced product.
  • The flat taxes don't actually amount to much in the grand scheme of things.
  • Somebody is going to argue for keeping the GST.
  • Somebody is going to argue for punishing the gas companies.
  • Somebody is going to set up an ineffectual agency to monitor gas gouging, but won't find anything wrong.

Quick relief could come by a reduction in the GST, I suppose, but then if people are used to paying $1.15/litre, the gas companies would still likely charge $1.15/litre. It would come at the cost of reducing the tax revenue, but increasing gas company profits.

The government could come in and force a 2-3 cent reduction in the price of gas. How that would work, I don't know.

I can buy the argument that increased gas prices will discourage unnecessary driving, but it also indiscriminately impacts the tractors, the combines, the pizza delivery guys, the taxi drivers and everybody who needs a car or gas-powered engine to function. Those businesses that should see increased revenue as people leave their cars at home, are going to pass their own gas consumption cost onto those consumers.

I have a feeling that the ominous warning in the report is going to come true.

Of course, no one is going to do anything about this. Just as no one is going to do anything about the fact that the industry is making billions from increases in crude oil prices that have nothing to do with its costs of production. Just as no one is going to do anything about the fact that every time the price goes up, the industry makes another windfall profit from their inventories of gasoline and heating oil.


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Anonymous said...

So why is gasoline different from any other product in the world?

A litre of gasoline is worth what someone will pay for it. I bet that if we were to apply the same logic to every other consumer product (I just paid $1.00 for 355ml of Diet Coke i.e. $2.82/litre) you would probably say that gas is a bargain.

If people have mismanaged their lives to the point that they need cheap gasoline to get by, why is that the problems of the oil companies. There are alternatives for most people - leave earlier to walk, bike, take transit to your destination or live closer to work/school/whatever.

These options may not be to your liking but too bad - life is full of choices and competing demands.

Jim (Progressive Right) said...

So why is gasoline different from any other product in the world?

That's a good question. It's different in the sense that it seems to be the only consumer product sold directly to the consumer as a commodity - market prices in the commodity market have an immediate impact on the consumer's price.

Wheat futures go up, I don't see the grocery stores marking up the price of bread.

Besides that, I see real competition between Loblaws and Sobey's. They don't "set" the price of bread in a neighbourhood.

I just paid $1.00 for 355ml of Diet Coke i.e. $2.82/litre

Drink tap water, filtered water, mineral water, milk, orange juice, apple juice, Diet Pepsi, Gatorade, Powerade, fruit punch, chocolate milk ...

You have a distinct option not to buy Diet Coke and distinct option to choose to live without it entirely, and besides, I bet if you looked hard enough (ie, Walmart, Zellers) you can find no-name diet cola for cheaper, or even Diet Coke cheaper.

If people have mismanaged their lives to the point that they need cheap gasoline to get by

So, if I mismanage my life to the point where I drive a cab for a living, I can start biking passengers, or better, piggy back them? Or, if I run a farm, perhaps I can hitch up some horses to pull the tractor or the combine.

And, remember, the bus and trains need gas too. Are they going to absorb the cost of higher fuel if I decide to take the transit, or they going to pass that cost onto me. Three guesses.

I would by your argument if there were true competition in the gasoline industry. There just isn't any evidence there is.

The free market should drive prices down. It isn't happening, so the market ain't free.

Anonymous said...

"I just paid $1.00 for 355ml of Diet Coke i.e. $2.82/litre"

Further to what Joe said, which was really the best point to make regarding your statement, I'd like to add the following...

You paid $1.00 for 355mL of Diet Coke. You paid a premium for buying such a small amount.

You could go to Sobey's this week and buy 5.68L (16 355mL bottles) for $7. You could have paid $0.44 for that one bottle if you bought smarter by buying bulk.

When you fill up a tank of gas, do you get 'bulk' discounts? No. You pay $1.15/L whether you fill your jerry can or your Winnebago.

So claims like "You pay $1.78/L for water!" are ignorant, at best, of all of the factors that play into the equation.

Brad said...

Damn. What Jim said. Not Joe. Sorry, Jim! :D

Matthew said...

The calculations done in this report are erroneous, it assumes 1 barrel of crude produces 1 barrel of gasoline, which is not true. I have analysed it in full on my blog, please check it out:

Jim (Progressive Right) said...

Matthew, I will certainly give your article a read.

crallspace said...

Gas companies suck! I can't wait til the day that oil is obsolete and these pricks ask for emergency funding to the tune of billions of dollars.

In Oregon, conservatives oppose investigation into gas gougers. Hmm... wonder why. Perhaps conservatives in the US are different than up there. The only thing worse than an American conservative is, perhaps.. the nazi party.

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